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April 04, 2013

(++++) CAPITAL WITH A CAPITAL C

Apparently the main thing
wrong with traditional American-style capitalism, with its emphasis on
individual abilities, success and leverage, is – just about everything. That
the whole model is fatally flawed is the underlying viewpoint, or perhaps the
conclusion based on evidence, of this book. New
York Times reporter Charles V. Bagli’s uncovering and unraveling of the
story of the failed deal for the Stuyvesant Town-Peter Cooper Village
middle-income housing project in New York City will certainly lend credence to
those who believe the Times is
unabashedly left-wing in its orientation, and never more so than when reporting
on business and its interrelationship with politics – which happens to be what
Bagli covers in the real-estate realm. Bagli reports the deal for Stuyvesant
Town-Peter Cooper Village by humanizing the residents of the 11,232 apartments
in the high-rises and by systematically dehumanizing, if not exactly
demonizing, the financiers and dealmakers of Tishman Speyer and BlackRock
Realty, who paid $5.4 billion for the property and defaulted three years later.
Although the featureless brick buildings were compared to “the architecture of
the police state” by one critic, the stories of the people who lived in those
buildings are told to excellent effect. Everyone knew everyone else in the
building, or at least those in nearby apartments; one man learned blackjack
from one neighbor and Spanish from another; residents were police officers,
firefighters, a banquet coordinator, a transit-system motorman – the salt of
the earth. Yes, there was a desegregation battle, and yes, “it felt like a
military camp at times,” as one resident put it, but by and large, as Bagli
presents the story, people were happy in the complex – and tremendously well
protected, through rigid rent control and later somewhat less rigid rent
stabilization, against the vicissitudes of the economy.MetLife, the longtime owner of Stuyvesant
Town-Peter Cooper Village, was not so protected, having to ask city officials
for any rent increase and falling short of the modest 6% profit it was supposed
to be allowed to make.

Eventually, MetLife decided
to cash out – right near the top of the real-estate boom. Its deal with Tishman
Speyer and BlackRock Realty was, like all major deals of this type, financed by
multiple sources, and there is nothing invidious about this, despite Bagli’s
repeated expressions of dislike for the use of OPM, “other people’s money.”
That’s capitalism; and what is the alternative for major deals of any sort? Not to do them at all? In any
case, Bagli carefully reports on the various parties who put a lot of money
into the deal, such as the California retirement system: “The managers sought
high-return real estate investments in order to meet their swelling obligations
to retirees” – retirees who, as it happens, were the same sort of people who
lived in Stuyvesant Town-Peter Cooper Village, albeit on the other coast. Tishman
Speyer did get to raise rents in the complex, at least in some apartments,
calculating that “rents for deregulated apartments at Stuyvesant Town and Peter
Cooper Village were running at least 12 percent below what was being charged at
comparable buildings nearby, while rents for rent-stabilized apartments were 30
to 40 percent below market.” But New York City’s strong controls on what a
building owner could charge put limits on rents. When the financial crisis in
housing started to take hold in 2007, things rapidly worsened for the complex’s
owners. And they had to contend with a lawsuit that said they “had illegally
charged market-rate rents for more than three thousand apartments after
‘wrongfully pocketing nearly $25 million in New York City tax benefits.’” The
notion of a lawsuit attacking building owners for charging market-rate rents –
no one said above market rate – may
seem ludicrous, but not in New York City and not to Bagli. And this is just one
element of the story of Stuyvesant Town-Peter Cooper Village, which Bagli has
clearly studied and analyzed inside-out, right-side-up and upside-down. His reporting is excellent, his writing clear,
his exploration of the greed (which could also be called, less onerously, the
determination to make profits) of the principals thorough. His reporting on the
owners’ mortgage default in January 2009 is well done, although his outrage
over the fact that Tishman Speyer and BlackRock Realty lost less than did many
of their investors is hard to understand: this is how major deals are put
together in American capitalism. Yes, Stuyvesant Town-Peter Cooper Village was
“a disastrous investment,” but it is hard to argue with Rob Speyer’s comment
that “a company is not judged by a single transaction.” One gets the feeling in
Other People’s Money that that is
exactly how Bagli thinks a company should
be judged. However, “the complexes remain intact,” Bagli points out, and a
MetLife executive is quoted as saying that most tenants “still have rent
stabilization protecting them.” So could there possibly be a flaw in a
political system that guarantees people well-below-market rates for properties
whose maintenance, upkeep and improvement must be paid for at market rates, with owners responsible even when macroeconomic
factors result in a vacancy rate far higher than any in a complex’s history?
That is not an issue that Bagli raises or, apparently, cares to raise. The ones
he does raise are fascinating, and
the detail with which he reports them is highly impressive. But the book leaves
behind a feeling, even after nearly 400 pages, that there is more to say about
Stuyvesant Town-Peter Cooper Village and the housing-driven financial crisis
that caused the deal for it to fail; and more to say about how this deal could
have been done differently, if it could have been; and whether the whole
concept of “rent stabilization” is an anachronism or a necessary counterbalance
to the market forces of which this particular deal ran afoul because of
circumstances partly within and partly beyond the dealmakers’ control.